Summary

According to 2010 Annual Report and 2011Q1 Quarterly Report, Agricultural Bank of China's (ABC or the Bank) total assets kept stale increase and the profits rose sharply, the growth rates were higher than our expectation.

As at the end of 2010, ABC's total assets rose 16% approximately to RMB10.34 trillion. Meanwhile, ABC's net profits increased strongly by 46% yoy to RMB94.873 billion, and it achieved to RMB34.073 billion, grew 36.41% by the end of 2011Q1.

Due to the obvious competitive advantages in banking business in county area, ABC still owns the most branches in domestic market, and has the great potential development especially in 2 and 3-tier cities.

In all, we still have quite strong confidence of the performance of ABC in future, and expect the Bank's net profits would increase approximately 32% yoy in 2011. We maintain 12-month target price of HK$5.00 to ABC, 33% higher than its latest closing price, the current price is quite attractive and still recommend Buy rating.

Stable growth in assets and owns obvious scale advantages

As at the end of 2010, total assets of ABC increased largely by 16% to RMB10.34 trillion compared to the end of 2009, which was the fourth largest bank in China. In 2011Q1, the Bank's total assets achieved to RMB10.96 trillion, increased by 6.02% yoy. We estimate total assets of ABC will grow around 17% to RMB12.05 trillion in 2011 compared to the end of 2010.

The assets growth of ABC is in the middle of the peers. However, compared with other banks, ABC owns the largest network of retail banking business in domestic market. As at the end of 2010, ABC`ATM was the largest among large-sized commercial banks, around 54,500, and owned over 350 million individual clients.

Fast development of banking business in County Area

Due to the large network in retails, especially in County Area, ABC still owns obvious competitive advantages in scale. As at the end of 2010, the portion of deposits of banking business in County Area to total deposits reached to 40.64%, and in 2011Q1, such portion increased to 41.14%, and the portion of loans of banking business in County Area to total loans achieved to 30.7% from 30.37% in 2010.

Retail loans increased strongly

ABC's loans maintained high growth, as at the end of 2010, total loans increased by 20% yoy to RMB4.96 trillion, and in 2011Q1, it achieved to RMB5.22 trillion.

On the other hand, according to the structure of loans, the retail loans of ABC have continued to increase strongly. As at the end of 2010, retail loans of ABC amounted to RMB1.14 trillion, increased by 45% yoy, and 23.09% of total loans, 4ppt higher than 2009. Residential mortgage loans were still the main part of retail loans, which were 14.62% of total loans, about 2.6ppt higher than the end of 2009, and increased largely by 45.52% yoy to RMB724.592 billion.

The quality of loans need to be improved continually

The number and ratio of non-performing loans (NPLs) of ABC continued to reduce while total loans increased obviously, representing the quality of the Group's loans developed consistently.

As at the end of 2010, the NPLs of ABC reached to RMB100.405 billion, decreased largely by 16.5% compared with the end of 2009. The NPL ratio reduced to 2.03%, 0.88ppt lowers than 2009. In 2011Q1, the NPLs decreased to RMB91.698 billion and NPL ratio reduced to 1.76%. Moreover, we noticed the loans to rural households increased significantly by 95% yoy in 2010, and its NPL ratio rose 0.41ppt to 1.59% compared with 2009.

We estimated the NPL ratio of ABC may reach to 1.79% by the end of 2011.

However, compared with other state-owned banks, the NPL ratio of ABC was the highest, by the end of 2011Q1, NPL ratio of ABC recorded to 1.76%, obvious higher than the peers. Its provision coverage ratio was on the bottom of the peers, which was 197.44%. Therefore, ABC's capability of resisting risks is relatively lower than other larger state-owned banks.

Intermediate business increased sharply

Intermediate business of ABC increased strongly in 2010, its net fee and commission incomes increased by 29.43% yoy to RMB46.128 billion, and settlement and clearing fees still were the main part of total commission fees, increased by 24.4% yoy to RMB15.187 billion. Additionally electronic banking service fees recorded the highest growth rate as 113.8%.

By the end of 2011Q1, net fee and commission incomes of ABC increased by 63.48% yoy to RMB17.749 trillion, obvious higher than the peers. We estimate its net fee and commission incomes would increase 30% yoy in 2011.

Strong growth of profits

Due to the strong increase of intermediate business and interest income, the profits of ABC experienced significant increase in 2010. As at the end of 2010, net interest income and net profit of ABC increased approximately by 33% and 46% yoy to RMB242.152 billion and 94.873 billion respectively, equivalent to EPS of RMB0.33.

We estimate the Bank's net profits would achieve to RMB125.338 billion, increase by 40% yoy in 2011.

Risks

Pressures of capital increase, as at the end of 2011Q1, CAR and core CAR of ABC recorded 11.40% and 9.61% respectively, which were the lowest in the Big-5;

Deterioration of quality of loans due the increase of NPLs.

Valuation

In all, the profits of ABC continue to increase largely and the quality of its assets is improved. We maintain its 12-month price of HK$5.00, around 33% higher than its latest closing price, corresponding to P/E 12.2x and P/B 2.7x for 2012 respectively, the current price is quite attractive and we still recommend Buy rating.

Financial data

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